Macro12.13 Essay Example | Topics and Well Written Essays - 1000 words

Macro12.13 - Essay Example There have been more investments and more growth of GDP (Pethokoukis 2012). The rise in OPEC oil prices as a result of fall in supply leads to a fall in demand for oil. The import of oil reduces by the oil importing countries. The prices of goods in the economy rise, and the rise depends upon the economy’s dependence on oil imports. Hence the rate of inflation soars high causing a macroeconomic slowdown (See figure below). The rate at which the economies recover from the recession depends upon the monetary policies adopted by the government. If the money supply curve is more elastic, the government targets to put control upon the interest rate. At lower interest rates the investors would be encouraged to make investments and the economy would recover faster. 3. Adaptive expectation is based on the principle that economic agents build their expectation of any macroeconomic variable, as the inflation rate or price level, as a weighted average of their past observations regarding that variable. Adaptive expectations are used in forecasting figures taking into consideration the interest and inflation rates. In this formation the agents ignore the changes taking place in the monetary and fiscal policies and only base their expectations on the past observations. One of the components of the rational expectation hypothesis, Robert E. Lucas, has emphasized upon the fact that the economic agents exhibit rational behavior by making a forecast of the economic variables taking into consideration the past as well as the present information available. If the government announces an inflation rate and chooses a different rate and increases the money supply, producers would increase output following the increase in prices. In the short run, this would increase output level in the economy, but with rational expectations, the agents would endogenize the discretionary policy of the government, at which point output

Carbon tax and Cap-and-Trade Schemes Essay Example | Topics and Well Written Essays - 750 words

Carbon tax and Cap-and-Trade Schemes - Essay Example In defining cap and trade system, a government literally puts a cap or limit on the overall level of carbon pollution. As the cap declines each year, it cuts industrial green house emission to the limit of regulation. This way, the government creates and distributes pollution quotas, which in turn create an incentive for industries alike to reduce their emissions (Andrew 64). In comparing the two taxes, the cap-and-trade tax has more certainty than the carbon tax. The cap and trade tax in terms of certainty can be achieved as it sets firm limits on the acceptable amount of emissions, thus achieving the desired outcome in reduction of emissions. This scheme has been used for decades by the United States to reduce emissions responsible for acid rain. By using the cap and trade system has reduced acid rain forming by half. As for the carbon tax the amount of emissions depends on the rise and fall of energy. For this reason many industrialized countries have used carbon taxes to disco urage fossil fuel and promote clean energy. For example, in Sweden carbon tax has been estimated to cut emissions by 20 percent enabling the country to achieve 2012 target under the Kyoto protocol . Carbon tax creates a fixed incentive to curb emissions since it can fix price of the carbon emissions. In assessing the cost or damage associated with each unit in pollution and the cost associated with controlling pollution. In essence its essential for the tax level to be right, if the tax is too low then the industries and households may opt to pay tax other than reduce omissions. On the other hand, if it’s set too high then the cost may indirectly impact profits, jobs and the end consumers. Cap and trade lacks price certainty since emissions permit prices may fluctuate from year to year depending on the demand for energy. This means that while the maximum pollution quantity is set in advance trading price on permits